RBC Raises Price Targets For Kinder Morgan Companies

By Michael Aneiro

RBC Capital Markets today raises its price targets for all the companies in the Kinder Morgan complex in the wake of the deal that wraps them all up under the Kinder Morgan Inc. (KMI) ticker. Here’s RBC’s breakdown:

RBC ups its KMI price target to $45 from $40 (it’s currently trading at $41.31 Tuesday)

RBC says it’s not making changes to any of its other estimates for any of the four, and the change in the KMI target price is the driver for the other three changes and assumes a target yield of 4.1%. From RBC:

[W]e remain positive on KMI’s proposed acquisition of KMP, KMR and EPB. KMI has effectively created an MLP in a corporate structure in our view, given its cash tax savings, payout ratio and cost of capital…. Given the cash tax savings that KMI can realize through this transaction, we estimate a very low cash tax rate for KMI, which we believe should enable it to effectively compete with MLPs for projects and acquisitions. Moreover, we believe the structure increases the pool of assets KMI can acquire… We believe a robust multi-billion dollar organic growth backlog will drive visible cash flow and dividend growth potential at KMI. We view KMI’s proposed acquisition of KMP, KMR and EPB as positive and value enhancing as we believe it can drive faster dividend growth longer term.

RBC also says this transaction was particular to Kinder’s situation, where its general partner was receiving nearly half the cash distribution from its underlying MLP:

We believe this transaction represents the best alternative for the Kinder complex given the cost of capital at KMP. KMP crossed the 50% splits tier in 2Q97, and we estimate ~46% of KMP’s distribution accrues to KMI. We do not view this transaction as a commentary on the MLP structure. We believe the transaction may, however, cause other MLPs that have crossed the 50% splits to re-evaluate options (including IDR reset, buy-in of GP) sooner.

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